AP — In 65 years, Israel has surpassed the dreams of its founders, emerging as the Middle East’s strongest military force, a global high-tech powerhouse and a prosperous homeland for the Jewish people.

Yet it remains a divided society, and its most intractable problem — peace with its Arab neighbors — has yet to be resolved.

On the eve of the 65th anniversary of its creation, the Jewish renaissance in the Holy Land remains a work in progress.

Dominating the short term is Iran’s nuclear program, which Israel believes is aimed at developing an atomic weapon that could be used against the Jewish state, despite Iranian denials. Unrest along Israel’s borders is equally worrisome.

Over the longer term, reaching peace with the Palestinians remains elusive, with the sides unable to agree even on how to restart negotiations. Palestinians consider creation of Israel a catastrophe that caused a stubborn refugee problem.

The 46-year occupation of Palestinian territories also ignites domestic and international tensions. Without a partition, Arabs could one day outnumber Jews, threatening Israel’s democratic nature.

Israel began observing its annual Memorial Day on Sunday evening, honoring fallen soldiers and victims of militant attacks. At 8 p.m., air raid sirens sounded nationwide to mark a minute of silence. A two-minute siren was set for Monday morning.

At sundown Monday, the country abruptly shifts its mood to mark its 65th Independence Day with fireworks, military processions and picnics. The transformation from grief to joy is an annual ritual meant to show the link between the sacrifices and the accomplishments.

“Today there are also those who rise up against us and threaten to destroy us. They did not succeed in the past, and they will never succeed,” Prime Minister Benjamin Netanyahu told a Memorial Day ceremony Sunday. Netanyahu’s older brother, Yonatan, was killed in a military operation in 1976.

Israel declared independence on May 14, 1948, marking the date each year on the Hebrew calendar. Since then, it has been in a constant state of conflict with its neighbors, most recently eight days of exchanges last November with Palestinian militants firing rockets from the Gaza Strip. It has signed peace treaties with just two Arab nations, Egypt and Jordan.

Yet the country is thriving in other ways. It has weathered the global financial crisis better than most, with unemployment below 7 percent and a growing economy. As a “startup nation,” it has pioneered breakthroughs, including Wi-Fi technology, the computer firewall and instant messaging. In the past decade, Israeli scientists have won six Nobel prizes in chemistry and economics.

It has absorbed immigrants from more than 100 countries to host the world’s largest Jewish population, evolving from a largely agrarian backwater to consistently rank high in measures of standard of living. Israel has given the world international supermodels, and its war history has inspired Oscar-nominated films and a TV series that was adapted into “Homeland,” the award-winning American show.

“The state of Israel is truly a fantastic success story, perhaps among the greatest success stories of the 20th century,” said Tom Segev, an Israeli author and historian. “There’s an Israeli culture, a renewal of the Hebrew language. The most amazing thing is that we now have a third generation of Israelis for whom the country is a given. ‘Israeliness’ has become something that we take for granted.”

On the other hand, Segev noted that the country is still grappling with the same basic issue that plagued it in 1948 — its relations with the Palestinians.

Israel still does not have internationally recognized borders, and remains in control of about 2.5 million Arabs living in the West Bank and east Jerusalem. Israel captured the areas, along with the Gaza Strip, in the 1967 Mideast war, withdrawing from Gaza in 2005. The Palestinians claim all three territories for a future state.

“We haven’t been able to solve this and we may not be able to solve it all,” Segev said. “Most Israelis look at the Palestinian issue as a military problem and not a political problem. As long as it is quiet and there is no terror, we think everything is fine.”

Israelis argue that the Palestinians have rejected generous peace offers, a claim the Palestinians reject, pointing to Israel’s construction of Jewish settlements in the West Bank and east Jerusalem as a sign of bad faith.

Nahum Barnea, a veteran newspaper columnist, said that even if Israel can resolve its conflict with the Palestinians, its place in the heart of the Muslim world will never be certain.

“The occupation [of the West Bank] is an open wound. But even if the occupation were to miraculously end, the country’s relations with the rest of the world would not suddenly be solved,” he said. “Our struggle is not behind us. It is with us and ahead of us.”

Israel has serious internal problems as well.

About 20 percent of its 8 million citizens are Arabs, who are often treated like second-class citizens and frequently identify with the Palestinians.

Nearly 10 percent of Israelis are ultra-Orthodox Jews, who have clashed with the general public over their dependence on welfare instead of work, refusal to serve in the military and attempts to impose their strict practices on broader society.

More than half of Israel’s first grade students are now either Arab or ultra-Orthodox Jews, predicting a future demographic makeup that is less loyal to the state and less productive to its workforce.

Israel’s transformation into a high-tech, knowledge-based economy has also fueled a growing gap between rich and poor, setting off protests in the summer of 2011 against the country’s high cost of living.

Despite all their issues, Israelis are among the world’s happiest people. Recent surveys by the OECD, Gallop and the United Nations’ World Happiness Report all had Israel near the top.

Most Israelis appear to have developed an ability to block out the nation’s problems and focus on life in a country that just a century ago was just a dream.

“Israelis feel that things are good with them, but not with the state,” Segev said.